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CV 2014 July 26 - 31
July 28 INTRODUCTION Henry Ford was reported to have said of his Model T car "Give them any color they want so long as it's black" CONSUMER CHOICE concept of INDIVIDUAL CHOICE is one of the most important in economics Stanley Jevons: "The theory of economics must begin with a correct theory of consumption" UTILITY THEORY theory of self-interest: we do what we do and but what we but because it makes us feel good, for the most part this boils down to three things: 1. pleasure people get from consuming a good 2. price they have to pay for it 3. income/budget available to them to exercise choices JEREMY BENTHAM'S UTILITARIANISM society should be organized on the "principle of utility" which he defined as the "property in any object to produce pleasure, good or happiness or to prevent pain, evil or unhappiness to him, all legislation should be designed on utilitarian principles to promote the greatest happiness of the greatest number bentham's followers believed that scientists would invent a machine that could measure pleasure util: measure of pleasure bentham's followers developed CARDINAL MEASURE utility measured in actual numbers its existence is debunked ORDINAL MEASURE ranks goods relative to one another you can say you like peas better than broccoli and you like ice cream better than both of those vegetables but you dont really need to say _by how much_ to rank your preferences for these goods FAVORITE ECONOMIST TRICK make a simplifying assumption to explain a complex point MEASURING UTILITY explain difference between TOTAL UTILITY and MARGINAL UTILITY show how utility-maximizing rule or EQUIMARGINAL PRINCIPLE allows to derive the downward-sloping demand curve EXAMPLE as consumption increases from 0 to 5, utility increases from 0 to 10 marginal utility steadily falls as consumption rises --> Law of Diminishing Marginal Utility --> sometimes you can get too much of a good thing total utility increases with consumption but does so at a decreasing rate; there is a diminishing marginal utility MARGINAL UTILITY additional utility derived from a one unit increase in consumption July 26 CHANGES IN PRICE AND QUANTITY Suppose you go to the store and see that the price of bread has doubled has the demand for bread risen? or has bread become more expensive to produce? without more information, hard to know could be either one, or both when prices or quantities change in a market does the situation reflect a change in demand or supply? PRICE CONTROLS use the supply and demand framework to illustrate some of the implications of introducing artificial price controls into the free market PRICE SUPPORT PROGRAMS set a price floor for the farmers' crops and commodities if market price fell below this floor, government would make up the difference to the farmer, in essence, by buying up any surplus PRICE CEILING market price = 0.35/loaf, price ceiling = 0.25/loaf leads to shortage in market the way that the government address the shortage was to ration bread supplies rather than simply taking money to the market place and buy bread, had to first get a ration card giving the right to purchase RATIONING AFFECTS DISTRIBUTION in the presence of price controls and shortages there can be a very different distribution of bread supplies in a free market, it is the product price that rations supplies - so-called rationing by the purse with price controls, it is the government that can control the "for whom" goods are produced THE MARKET ALLOCATES GOODS & RESOURCES by determining the equilibrium prices and quantities of all inputs and outputs the market, not the government, allocates or rations the scarce goods of the society among the possible uses 1. What Goods Are Produced -> answered by signals of the market prices -> high oil prices stimulate oil production -> low food prices drive resources out of agriculture -> those who have the most dollar votes have the greatest influence on what goods are produced 2. For Whom Are Goods Produced -> power of the purse dictates the distribution of income and consumption -> those with higher incomes end up with larger houses, more clothing, longer vacations 3. How Are Goods Produced? -> when corn prices are low it is not profitable for farmers to use expensive tractors and irrigation systems, and only the best land is cultivated -> when oil prices are high oil companies drill in deep offshore waters and employ novel seismic techniques to find oil WHAT'S A COFFEE CEO TO DO? In business it's all a gamble but as a Chinese philosopher once said chance favors the prepared mind, or in this case chance favors the prepared micro economist CONCLUSION economics is not something to memorize but rather something to conceptualize as you study it, think about it too your job and your business just might depend on it